In a note on Monday, Deutsche Bank
strategists Oleg Melentyev
and Daniel Sorid said that that likely spells
bad news. Stress in the financial sector usually
precedes a period of volatility.

"Their importance as a leading indicator stems not
only from their vulnerability to systemic risks, but also to
their direct exposure to troubled sectors," the note said.

The pain has been broad-based. US financial stocks have
underperformed the S&P 500 by 7.5% since August, despite a
Fed rate hike that was supposed to help bank stocks.
European banks have underperformed the Stoxx 600 by 10%,
according to Deutsche Bank.

Risky bonds have taken a battering, too, with
bank-contingent capital securities, or "cocos," selling
off.

These instruments have coupons like traditional
debt but can be written down or converted into equity if a bank's
capital falls below a certain
level.Deutsche Bank itself has seen the
prices of its cocos fall to record lows.

That does not bode well. Financials have
suffered one to 12 months ahead of a spike in corporate defaults
in each of the last three periods of credit stress.

Here is Deutsche Bank (emphasis added):

These developments in the pricing of bank securities
suggest a risk of a more disorderly period ahead, given the
critical role financials play both in the economy and in the
historical experience with credit
cycles. The resilience of US banks to date
suggests that these issuers continue to be perceived as safe
havens in the market, but their dissociation with
European financials strikes us as unsustainable in the
presence of credit stresses that are more global in nature.

US and European financial-stock performance relative to
the index.Deutsche
Bank